Professional Documents
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Banking Principle - Capital
Banking Principle - Capital
Chapter 15
What is capital
Funds contributed by the owners of the firm Investors who have stocks and preferred stock in the bank
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Key Topics
The Many Tasks of Capital Capital and Risk Exposures Types of Capital In Use Capital as the Centerpiece of Regulation (optional reading) Basel I and Capital adequacy ratio Basel II (optional reading) Planning to Meet Capital Needs (optional reading)
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Liquidity risk
Operational risk
Exchange risk Crime risk
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Types of Capital
Common stock Preferred stock Surplus Undivided profits Subordinated debentures Minority interest in consolidated subsidiaries
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To limit the risk of failures To preserve public confidence To limit losses to the federal government arising from deposit insurance claims
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The Basel Agreement of 1988 includes risk-based capital standards for banks in 12 industrialized nations; designed to:
Encourage banks to keep their capital positions strong Reduce inequalities in capital requirements between countries Promote fair competition Account for financial innovations (OBS, etc.)
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Stockholders' equity is deemed to be the most valuable type of capital Minimum capital requirement increased to 8% total capital to risk-adjusted assets Capital requirements were approximately standardized between countries to level the playing field Capital is divided into Two Tiers
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Tier 1 Capital
Common stock and surplus Undivided profits Qualifying noncumulative preferred stock Minority interests in the equity accounts of consolidated subsidiaries Selected identifiable intangible assets less goodwill and other intangible assets
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Tier 2 Capital
Allowance for loan and lease losses Subordinated debt capital instruments Mandatory convertible debt Cumulative perpetual preferred stock with unpaid dividends Equity notes Other long term capital instruments that combine debt and equity features
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Basel II
Aims to Correct the Weaknesses of Basle I Three Pillars of Basel II:
Capital Requirements For Each Bank Are Based on Their Own Estimated Risk Exposure from Credit, Market and Operational Risks Supervisory Review of Each Banks Risk Assessment Procedures and the Adequacy of Its Capital Greater Disclosure of Each Banks True Financial Condition
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